Energy and Climate Change - Minutes of EvidenceHC 117

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Oral Evidence

Taken before the Energy and Climate Change Committee

on Tuesday 15 May 2012

Members present:

Mr Tim Yeo (Chair)

Barry Gardiner

Ian Lavery

Dr Phillip Lee

Albert Owen

Laura Sandys

Sir Robert Smith

Dr Alan Whitehead


Examination of Witnesses

Witnesses: Volker Beckers, Group Chief Executive Officer, RWE npower, and Dr Tony Cocker, Chief Executive, E.ON UK, gave evidence.

Q1 Chair: Good morning. Thank you very much for coming in. I know we have asked you at relatively short notice, but you will appreciate this is a particularly topical subject in which there is a great deal of interest both from the Committee and, I think, from a wider audience. We appreciate your availability. Feel free to be as discursive as possible in your answers. Don’t confine yourself to the precise topics of the question if you think there are other relevant issues. Clearly, the whole subject of EMR is also extremely topical and there is considerable interaction. We will be carrying out a pre-legislative scrutiny of the draft Bill, which we hope to see next week. If there are things you want to bring to our attention that relate to that, we would be very happy to hear them.

I start with a general question about the recent decision. What was it that triggered the strategic reviews that both your companies undertook before making the decision that was announced at the end of March?

Dr Cocker: Well, in the case of E.ON, I think the overall decision was really down to the financial firepower of the company. I think it is well publicised that a number of issues have affected our financial performance as a company over the last two to three years. The long-term contracts for gas that we have are high priced relative to the marketplace. Also, the spreads on generation production across most of Europe have narrowed and many plants are either making very low margins or much lower margins than they were making before. Then, thirdly, there was the nuclear decision in Germany, which has obviously impacted on our cash flow. Those three things together impacted the cash flow of our company.

Now, back in, let’s say, November 2010 we set out our E.ON strategy, which was really saying we will continue to develop in Europe and optimise our assets in Europe. In addition to that, we will invest outside of Europe, and we set ourselves a target of growing our businesses outside of Europe at that point in time. That sets the context when these financial issues really hit us. Therefore, we said, "Okay, how do we prioritise where we make our investments?" We said that when you look at a nuclear investment it is extremely long term and, yes, you may get a good return at the end of that long term but it is a very substantial investment at a single site for a long period before you get a return on the investment. That is the general context.

In terms of timings, as the two companies and Horizon, we spent most of 2011 and previously working with the vendors to really get good bids for the plants from the two preferred vendors. Working with them, we reduced the price and reduced the risks and as of January/February we were in a position where we needed to take a decision to go left or right with one vendor or the other. At that point in time as E.ON we took the opportunity to step back and say, "Look, if we go left or right, then we are committing ourselves for a further period and we are narrowing down our options. Isn’t this a time at which we should sell the venture, seek another purchaser who can take the venture forward?" I think that sets out the timing and the strategic context. It is really about our broader strategy and then our financial firepower and saying where are we going to focus, and then the technology decision to go either left or right, as the vendor selection process required us to take a decision to go either left or right. We said, "Look, given that we need to take a decision, actually this is a good time at which to take a decision not to go forward".

Volker Beckers: It is just worth emphasising what has changed between when we started Horizon back in 2009 and 2012. Clearly, the financial crisis has meant not only that capital is at a premium for large infrastructure projects and that developed over the three years very much to our disadvantage as far as Horizon was concerned, but secondly, the markets have weakened as well. If we look at the margins of gas plants in particular, they are at alltime lows right now, and the situation has been exacerbated by the decision in the German market, after the Fukushima event, to withdraw the lifetime extension. That decision, which was combined with the decision to close eight reactors, or not even to reopen some, because they were already shut, led to a significant deterioration in our financial performance.

But the timing I think is quite important. Why in Q1 2012? As you know, we were very much in the final stages of selecting either Westinghouse technology or the AREVA technology and that offer effectively timed out at the end of March. We were very clear when we arrived to the conclusion to exit that we want to give a potential purchaser the maximum flexibility to choose either of the two technologies. That is where we are with Horizon at this point in time.

Q2 Chair: Is there any circumstances under which this decision might be reversed?

Dr Cocker: No.

Volker Beckers: It is simply a fact that we cannot afford this investment.

Q3 Chair: Are either of your companies contemplating new investment in nuclear elsewhere in the world?

Dr Cocker: Yes. At E.ON we are participating in a development in Finland. That is further behind relative to where we were with Horizon and it is smaller. A decision will be taken in due course but that is not needed yet. Having said that, you will also know we continue to operate nuclear power stations in Germany and continue to operate nuclear power stations in Sweden. We will operate those in Germany until their lives are expired as agreed by the Government and those in Sweden until the lives are expired as determined by the engineering and safety cases.

Volker Beckers: As far as RWE is concerned, we have three reactors that we can continue to operate under the new regime in the German market. We have a small stake in a nuclear plant of 30% in The Netherlands, but there is no new build project that we are pursuing.

Q4 Chair: If Finland is still part of E.ON’s programme, is it fair to say that the Finnish context is more sympathetic to nuclear investment than the UK context?

Dr Cocker: No. I think it is simply a timing thing. In fact, our Chief Executive, Johannes Teyssen, said at our annual results meeting in mid March that the investment framework in the UK was one of the best investment frameworks anywhere. If behind your question you are saying is it something about EMR and asking whether there is a better investment framework in Finland than in the UK, the answer is no. We believe that the investment framework in the UK is as good, is developing very well and is one of the best in Europe or the best in Europe. The issue is really more about timing and scale and we had a decision to make here in the UK. We do not yet have a decision to take in Finland.

Q5 Chair: We will explore the EMR a bit more in a moment, but just on this issue, the German decision to wind down nuclear power in Germany is clearly a big factor. If that decision had not been taken, and if Germany had not had a change of policy after the Japanese accident, would that one altered factor have been sufficient to allow you to continue with Horizon?

Dr Cocker: I think we have always said it was a combination of factors. Each of the three things that I think we have each said in our different ways-the gas price issue in Germany and Continental Europe, the spreads, the margins on conventional plant in Continental Europe, and the nuclear decision-has hit our cash flow. It is a combination of all those three things not any one individual item.

Volker Beckers: There is nothing to be added. I guess it is very speculative if you isolate any of these factors, but it is fair to say that if all these factors hadn’t occurred, we would be in a different situation.

Dr Cocker: Yes.

Q6 Albert Owen: Good morning, gentlemen. Could you just explain to the Committee the impact of the German decisions? A nuclear tax is one of the elements; another one is decommissioning because you have to close down plant earlier. Can you explain what kind of generating life was left in the stations that will be forced by Government policy to close down? Can you just give us a flavour of the impact?

Volker Beckers: When the consultation on the lifetime extension took place, the decision was made that most of the newer reactors will get a lifetime extension of eight to 12 years in general. As part of that, there was a decision to take some of the fuel costs and increase them by what was called a fuel rod tax. That was a combination of lifetime extension and introducing a tax on uranium, effectively.

The decision post the Japan event was not only that the lifetime extension for all stations was withdrawn, it effectively led to curtailing the lifetime of, as I said before, eight power stations. Most of the plants will close by 2020-2022 in this timeframe, so we have another eight to 10 years in the German market. As you rightly said, that also means that for some of the plants that are now closed or mothballed, we have an accelerated decommissioning programme. Combined with that, however, the fuel rod tax is still there. Obviously, it has been legally challenged but at the moment companies that operate nuclear stations have to pay it. That is the current assumption. It is not clear yet what the court will decide eventually. You have an accelerated decommissioning programme. You have lost revenue as a result of that curtailed lifetime and you have reduced revenue because some of the plants that you assumed will be on the system won’t be there anymore. It is a combination of all these factors.

Q7 Albert Owen: I know this might seem an unfair question but I am going to ask it anyway. Merkel was very pro nuclear a couple of years ago; if she loses power in Germany and there is another shift, how will that affect your decision to invest in nuclear in Europe in the future? If the previous decision is reversed and they then say, "Look, we now need nuclear, we can’t rely on imports from elsewhere. Our climate change targets won’t be reached. We are going back to the nuclear situation", how would that impact on your business? Do you have the flexibility to reverse your decisions?

Volker Beckers: Well, these are two questions. Let me start with the first one because I think there is an interpretation that it was a political decision that we withdraw from nuclear. That is not the case. I think the consequences of the decisions in the German market combined with the factors we talked about earlier led to this decision. It is a question of are we able to invest in low-carbon technology that effectively means that we have to invest in the next 10 years, using Wylfa as an example, of around £10 billion to £12 billion? Any decision will have to be based on its commercial merits and, indeed, whether it is viable.

Let’s be clear: when you invest in a particular country it is all about the energy policy in place and public support. If you look at public support in the United Kingdom in comparison with Germany, it is a very different picture. I don’t know where the recent polls have marked support but it is certainly above 40%. In Germany you have the reverse picture, I think public opinion is more than 70% against nuclear. What I am saying is that the political support in this country is very strong but it doesn’t mean that our financial situation has changed. It is very speculative that such a decision would change anything.

As to your second question about whether we have the skills to operate power stations, that comes back to my earlier point. We still operate nuclear power stations. We have three that will remain on the system for the next eight to 10 years. Yes, we have the skills.

Q8 Albert Owen: My point was you are losing generation by this quick decision to close down and not extend them. If that decision had not been reached, would you consider continuing? I know it might sound hypothetical now but-

Volker Beckers: But then all the other factors have to change as well.

Dr Cocker: I think it goes back to the question before. There was no single factor. It was a combination of factors.

Q9 Sir Robert Smith: Did you notice with the German decision that the financial markets put a greater risk premium on other countries’ nuclear investment or did they really see it as a German decision that was not necessarily indicative of a risk in nuclear?

Dr Cocker: I am not sure. That is not something that we have specifically noticed. In fact, if you look across Europe there is a mixed picture. Yes, some countries have stated they will withdraw from nuclear, like, for example, Germany. On the other hand, other countries are still developing nuclear. From our perspective, it is not sufficiently clear to say there is a risk premium attached by the financial markets.

Q10 Sir Robert Smith: As the Chair said, we are about to embark on electricity market reform and we are about to scrutinise the draft legislation. It is the final chance to get it as right as possible in terms of the future of this country’s energy policy. You said in an earlier answer that the electricity market reform did not make a difference to the decision, but surely if it was so enticing there must become a tipping point where it would motivate a decision.

Dr Cocker: I think the factors that have caused the decision were independent of electricity market reform. The decision was made for our company independent of energy market reform and, indeed, we believe that the general direction of energy market reform is very positive towards investment. As I said, Johannes Teyssen quoted that. Specifically, the CFD and the capacity market or capacity payment will be very positive towards investment when they are implemented. I will come back to that in a moment. I think in addition to that if we broaden it out it was very clear to us and to me personally-having been out of this market for quite some time because I was working in Germany, as you know, for a period and came back in October-that the British authorities, both this Government and the previous Government, had worked very hard to put in place not just energy market reform but to improve the overall institutional framework for investment in nuclear in this country. So reforming the Office of Nuclear Regulation, for example; really working hard on the waste issue; putting in place the Nuclear Development Forum to help to ensure that there is a supply chain. It is not just about energy market reform, it is that broader context that I think the UK authorities have really worked hard to put in place. What I would say is we saw all that context, which was positive in our view, but our decision was based on the overall financial and strategic constraints.

In terms of going forward and your question about energy market reform, how can we continue to develop energy market reform to ensure that we do get investment and not just in nuclear but in the full range of low-carbon generation-offshore wind, onshore wind and biomass-and also in CCGTs. I think the simple thing from our perspective is to focus on the two bits of energy market reform that really make a difference, which is the CFD and the capacity payment, and work on those and get those sorted out as soon as possible. By sorted out, I mean three things in the context of the CFD: the strike price, the counterparty and the overall drafting to ensure that they are as immune as possible from future political and regulatory interference. On the capacity market, we need to get that designed as quickly as possible so that we can then encourage CCGTs to come on to the system as well. Going forward, those will be the two things I would focus on. I would add that the carbon price floor is just a tax, does not incentivise investment, is bad for customers because it puts up everybody’s energy price, and it is a windfall subsidy to old nuclear generation and old hydro, which was built and funded largely by our fathers and mothers.

Q11 Chair: It sounds as though you share our bewilderment that the Chancellor of the Exchequer says he is very anxious not to damage Britain’s competitive position by policies that might somehow load costs if we have very strong pro low-carbon tax incentives, and yet the actual introduction of the floor price for carbon does exactly the opposite to what he says he intends.

Dr Cocker: Well, I have not read all of his speeches in great detail, but the carbon price floor, as I said, does not incentivise investment. It does put up electricity prices for all customers, whether they be households or large industry. It does not do what it says on the tin and it is bad for customers in this country.

Volker Beckers: Can I just add one thing that I think is quite important, Mr Chairman? Coming back to whether there is a premium for nuclear, which was the original question before we embarked on EMR, I guess there is a general and a specific answer. The general one is, as I said earlier, that large investments and large capital requirements are at a premium. If you look at analysis we have seen from one of the big four audit firms looking at all investments needed in Europe and the United Kingdom in particular, it is very clear that without the financial sector, the energy sector alone is not able to stem all these required investments. That is factor number one, which does not help the CAPEX requirement and the cost of borrowing this money.

The second one, and that is a specific nuclear issue, is that nuclear has very long lead times. From the day when you start consenting to then construct and then commission the plant, it is probably between eight and 10 years. That is currently best in class. You have effectively eight to 10 years where you do invest the £10 billion to £12 billion, to use the example of Wylfa, where you do not generate any trade revenue, and then after that you will then be in a position to pay back your debt. That is a very nuclear specific one in answering your question. That is definitely something we see in the market that has caused a premium and will cause a premium for any investor. Therefore, it is quite important that any policy framework does provide that longevity, that long-term certainty in terms of what the investor in a particular nuclear power station will eventually get when it does generate electricity. I think that is quite crucial.

Q12 Sir Robert Smith: Do you see EMR delivering that?

Volker Beckers: Delivering suggests we are already assessing something that is fully in place. I think EMR is addressing all these points, for example, the need for longterm certainty; hence the decision on the contract for differences, which gives that certainty to a strategic investor, to an energy company, and the financial investor. I think where more certainty is needed, as we heard before, is on the price and who effectively is the guarantor of these contracts. That is something that is not worked out yet, certainly not in the details that are required to make these final decisions.

Q13 Dr Whitehead: Could I just dwell for a moment on contracts for difference and, indeed, strike price in EMR. Your understanding is that the question of counterparty on contracts for difference is not yet resolved as far as the future course of the arrangements are concerned. Is that a material consideration as far as your possible investment decisions on nuclear?

Volker Beckers: The first question is: is it important for our decision? Answer: not anymore, and I think we explained that this has nothing to do with this particular subject on EMR. But it is definitely a crucial element of the EMR. When we started last year on the consultation on what is actually needed, there was an expectation that the CFD would be backed by Government. To put it in layman-speak, who is ultimately signing the cheque? The expectation was it would be the Treasury. Now, we are miles away from that very point. A different path is now being pursued by Government and we need to see what ultimately the detail of that looks like. But I think moving away from a triple A guaranteed contract, which was honoured by Government, to a statutory contract using different instruments, is a big shift in this process over the last six to nine months.

Q14 Dr Whitehead: Is your understanding now that the likely outcome of a contract for difference guarantee would be some form of jointly financed back-up fund as far as CFDs are concerned? In your view, would such a fund increase investment costs because of the need to contribute to such a fund?

Volker Beckers: Ultimately, I think you have to ask the Minister that very question. My understanding is that we are certainly not in the position any more where we could count on a triple Abacked contract. I think any deterioration from that very point inevitably has an impact.

Dr Cocker: I think I would take it back to this layman’s terms and also look at it across all of the investment. I think your original question was about premium for nuclear, and nuclear has particular challenges, but offshore wind is also a pretty chunky investment. It is not as chunky, but nevertheless quite a chunky investment and, therefore, needs some certainty to support investment. Now, the current ROC regime has done that and I think the CFD regime can be better. That investment could be more financeable if we get the CFD right. We know there is obviously a substantial need for investment both in nuclear and in CCS and in offshore wind, so getting the CFD right and the right arrangements governing it is extremely important to reduce the cost of capital to enable investors and also to bring in financial investors as well as strategic investors in due course.

Q15 Dr Whitehead: In your view, does that include a differential strike price between nuclear and other low carbon technologies?

Dr Cocker: At this point I don’t know. In fact, there is also a timing point there anyway, which is that we are working very hard to drive down the cost of all technologies, but if you look particularly at offshore wind, we are working very hard to drive down the associated cost. We would expect strike prices ought to be able to come down over time.

Q16 Dr Whitehead: But I was wondering whether you either have envisaged in the past or do envisage now that a part of the investment scenario might be the establishment of differential strike price levels for nuclear and for non-nuclear.

Dr Cocker: That we have not discussed.

Volker Beckers: Maybe on your question, I think personally it is quite important that we do keep a diverse energy mix. I have said this previously and I want to repeat this here as well. It is quite important that we do not start to pick winners and just focus on a few technologies. I think the key will be that we maintain a mix with conventional plant as we have very efficient CCGTs and also coal with carbon capture storage, as well as wind offshore and onshore as well as nuclear. That is why I always felt whatever we do as part of the EMR we need to ensure that there is a level playing field between all technologies. What do I mean by that? Very simply that technologies compete for the investment from energy companies. As soon as you start to become technology-specific on elements, investors will rush into that particular technology. We have, therefore, made investment decisions a few years ago on the most efficient CCGTs. In fact, they are just coming to the system, Staythorpe last year, Pembroke this year, and that alone is 2.5 billion in investment. For us it is quite important that we can operate these plants in the most efficient way. They are the most efficient in Europe. At the same time we are one of the largest investors in renewables. Any change in technology-specific incentives would obviously jeopardise the ability to ensure that there is a level playing field and that we have and maintain a diverse energy mix in this country. I think that is quite key for policy going forward.

Dr Cocker: The conversation, of course, starts on nuclear but I think it is important to say that the decision we made was about nuclear. We continue to invest in the full range of other technologies-offshore wind, onshore wind, biomass and CCGTs and, indeed, also gas storage. For example, last year we invested £1 billion in those technologies and our plans for this year are of the same order of magnitude. We are continuing to invest. The conversation started on nuclear but we are continuing to invest in all of the other technologies. As the EMR framework becomes clearer that will facilitate further investment.

Q17 Barry Gardiner: Did you guys know something that Centrica and EDF did not? Because you made your announcement about Horizon back in March and in April, of course, Moody’s threatened to downgrade Centrica and EDF if they went ahead with the four reactors in the UK on the basis that there was uncertainty about the future electricity prices in the UK. Obviously, if there had been a downgrade then it would have made it a lot more expensive to borrow that money. Do you agree with Moody’s? How much a part of your thinking did that uncertainty over future electricity prices play?

Dr Cocker: From our perspective, when we looked at the investment decision it was for the reasons we described earlier.

Barry Gardiner: I am always suspicious if somebody says, "I refer you back to my earlier answer" because it means they do not want to answer this question.

Dr Cocker: I am going to answer, but with respect to the electricity price risk in the country, the purpose of the CFD is to take that risk away, essentially.

Q18 Barry Gardiner: Do you disagree with Moody’s?

Dr Cocker: The Moody’s view was not part of our decision making. Our view was that an investment in nuclear in the UK was independent of electricity price in the UK because the CFD would sort that out. It was dependent on the strike price but was independent of the daily, weekly, monthly electricity price. In that regard, if Moody’s are focusing on the electricity price uncertainty in the UK-

Barry Gardiner: That is what they said on 7 April.

Dr Cocker: -I would disagree with them. I do not know whether we have a company line, but I personally would disagree with them. It was not from our perspective about the electricity price because the CFD would give you certainty on-

Q19 Barry Gardiner: You were not worried about a downgrading at all?

Dr Cocker: That was not-

Barry Gardiner: By proceeding with Horizon?

Dr Cocker: Yes, that was not part of our decision making.

Q20 Barry Gardiner: No, nothing. Do you think that you might have had a downgrading? Do you think Moody’s might have taken a look at you and said, "Actually, guys, we are not so confident in you any more"?

Dr Cocker: Well, again, it is speculative, it is a "might have".

Barry Gardiner: Oh, it is. I am just trying to flesh out how much a part of your thinking such a thing might have been.

Dr Cocker: Yes. They have not downgraded us on that basis and we have taken the decision-

Q21 Barry Gardiner: You have taken the right decision?

Dr Cocker: We have taken the decision anyway, yes.

Volker Beckers: Can I just come back to your point? Are we worried about downgrading generally? I think the obvious answer is yes. We have been downgraded by one notch last year for all factors and every downgrade means that capital becomes more expensive. We know all of that. To mitigate this and to maintain a single A-rating, we had to put a lot of measures in place. On efficiency, we had to increase our capital, at least we got the decision to be able to do it; and, thirdly, last year we started a divestment programme that RWE has announced of €7 billion; and we have reduced our capital requirements. Inevitably, your answer is if you do all of that, divestment, reducing capital and at the same time commit on one of the largest CAPEX programmes, you will face a downgrading. In the case of RWE-I cannot answer for EDF and Centrica whether it would have been wrong as well-it would have meant a downgrading and we could not afford that. Therefore, we had to be disciplined as we all will be if the money gets tighter.

Barry Gardiner: Thank you. That seems a much more straightforward answer.

Q22 Sir Robert Smith: Going back to your earlier answer about not picking winners, which I am instinctively sympathetic to, when you have one technology, nuclear, which is high capital and a long return, and then you have onshore wind and offshore wind with their different cost bases and the cost bases coming down, and a desire to get marine, tidal and wave into the mix, but obviously with a lot more incentive needed to start it up, isn’t there inevitably going to be an element of the Government having to send different signals to different markets if you are then going to achieve your goal of a balanced mixed portfolio?

Volker Beckers: Okay, this is a number of questions. Let’s start from the more technical angle and then I’ll come back to what is actually needed on the policy, if that is okay. Technically, I think it is possible to look at different portfolio mixes between renewables, nuclear base loads and conventional plant. I think the question is going to be if your share on offshore wind, for instance, increases, that inevitably has effects on the infrastructure of the system so you have to take that into consideration. But technically that is all possible and I think we keep forgetting demand side measures as well, reducing demand and shifting load as well, but I do not want to further complicate the question.

Then, secondly, the question is then what about emerging technologies, technologies that are in their first years are inevitably very expensive. Do we need some extra incentive so that tidal you were referring to, some biomass generation potentially as well, get started at least by investors? I think the answer is yes. You need to have a special stimulus for these technologies in the initial phase. The question, however, is how long is that phase. Is there a trajectory so that investors get the certainty if you start early, but then that incentive goes down over time? I think that is what we see at the moment where the Government has tasked the industry to look at offshore wind, whether or not it is possible to bring these costs down to £100 a megawatt hour, which is facilitated by the Crown Estate. They are looking at that and we expect a report coming back. At the moment, we are nowhere near this £100 per megawatt hour for offshore wind.

Then there is a third element, which is about how should the policy look. Well, I come back to the proposal I made a few years ago where I said actually we have already a proven system. We have a proven system with a renewable obligation, which every investor understands. At the moment, it is just focusing on wind and biomass. My proposal was why not extend the renewable legislation to all low-carbon technologies and make it an obligation on the supplier so that they have to procure a certain amount from low-carbon technologies, ensuring that at least the incentive scheme is the same for all low-carbon technologies so that they can compete. The investor then will inevitably choose technology they understand best, they believe they can best deliver upon, and they also believe in the long term delivers best value for the company, for the investor ultimately.

My view would be to have a level playing field as much as you can but for emerging technologies you need an additional stimulus. That is certainly the case for marine technologies.

Q23 Laura Sandys: Just going quickly back to the nuclear question, the big question is that you are saying that the way we have structured our regulation is increasing cost of capital through the contract not being in a triple A relationship, and because investment is tied up for ten to 12 years before you actually have generation coming through the system. There is also an uncertainty of price and long-term political will that will support the contract for difference. If you were offered a job to run a large energy company that had a high percentage of nuclear capacity, would you take that job?

Volker Beckers: This is a job offer now. Sorry, I want to be serious.

Q24 Laura Sandys: I mean does nuclear have a future in the structures that we are putting forward from a Government point of view or does it need so much greater incentive to derisk it for you to take this excellent job that I am now offering you?

Dr Cocker: I think we are putting in place the right structure. The fundamental principle of putting in place the CFD I believe is the right way to derisk, take away the price risk from the project, so when you invest you have price certainty. Having said that, we also referred to the counterparty. If you take that risk-it is a very long term, 20-year, 30-year risk-is the counterparty still going to be solvent and be able to pay that CFD in 20 years? Therefore, you need a very solid counterparty and, returning to the cost of capital issue or credit rating issue, the more solid the counterparty is, the lower will be your cost of capital. I think we are putting in place the right framework but we need to focus on those issues, the counterparty, the precise mechanism of the CFD and the strike price, but is not a secondary issue, it is a very primary issue. We need to get that sorted fairly quickly so that final investment decisions can be taken. I do believe that the UK is putting in place some good market framework and the right institutional framework to encourage investment in nuclear in this country. It just so happens-

Q25 Laura Sandys: But do you believe it will be a reality? Do you believe that your commercial analysis rather than what we understand to be called a backdrop of overseas political environment? If you were Sir Humphrey, would you be saying to Centrica and EDF, "It would be a very, very brave Minister to be taking these decisions and investing in nuclear"?

Dr Cocker: If you have the patience of capital, the specific issue that we talked about from our perspective was the longevity of the return. It takes 10 years from today to have Wylfa up and running and, therefore, first you need cash out. Are there investors who have greater patience than we have? We believe there are. I would not want to speak for EDF or Centrica, but we believe there are investors out there who have greater patience than us and, therefore, will take Horizon and develop Horizon.

Q26 Laura Sandys: You have not quite taken the job but you have advised your friend to take the job?

Dr Cocker: I have advised my friend to take the job, that is right. He is younger than I am.

Q27 Chair: Another issue you mentioned, which is not quite so directly related to nuclear but is interesting, relates to the element of uncertainty about capacity payments. Do you think that as long as that element of uncertainty exists there will be investors who decide to delay investing in new gas-fired capacity because they want to see what they might be able to get if they come into the game a bit later?

Volker Beckers: Okay, a few comments to this. First of all, we already see that less efficient plants are taken out of the system. We see that new investment proposals are not coming forward in the way we all would expect. Having said that, my company has made the opposite decision and invested and committed to £3.5 billion over the last three years. I think to make even more investments that are needed, and we keep talking about the impending gap and the 200 billion that is needed, clarity is absolutely paramount for making new investment decisions. I think you are combining this now with the question of will capacity payments and capacity markets in particular stimulate these investments.

Now, I guess there are two different things. On the one hand, we see a system that is sufficiently supplied at the moment. I mentioned this earlier. For new gas stations we have spreads, so the margin we make on a gas plant, which have had historic lows, may be close to zero, or around £1 or £1.50 at the moment. You need at least eight to sustain the commercial viability of these plants. That is the situation in the market right now.

At the same time, we are concerned about capacity not being added to the system when all the older stations will retire in the next 12 to 24 months under the Large Combustion Plant Directive and there will be also old AGR nuclear reactors that will close in the next few years. My personal view is that the case for a capacity market has not been made yet. In fact, you just go back five, 10, 20 years and you always see at the horizon that there is going to be a capacity gap. That is why I am so strongly arguing for a market-based framework. The market eventually signals this scarcity of capacity and, therefore, reflects this in prices, but at the moment you do not see this in the market. In fact, power prices are very, very low and, therefore, are at the margins. When the market realises that, that gap will open. I personally believe that if we maintain the current framework with the amendments I was talking about in terms of the low-carbon obligations in comparison to the renewable obligation, - that would help. Discussion about a capacity market will inevitably lead to, "Well, give me the details and then I can make an investment case". I hope that answers your question.

Sir Robert Smith: Chair, can I just remind the Committee, given what we are talking about, of my entry in the Register of Members’ Interests relating to the oil and gas industry and particularly a shareholding in Shell?

Dr Cocker: I think I look at it somewhat differently from Volker, although many of the fundamentals are the same. Clearly, the market is not signalling a need for new capacity at the moment. The spark spreads are very low. We have seen plants being mothballed. At the same time, it is equally clear that a number of old coal and nuclear stations will close in the next few years. Therefore, if you look at it, step back, it is clear that the UK system will need some new conventional capacity in the next few years. This gap in the next few years will not be filled by the growth in renewables or nuclear. That is clear from stepping right back, but the market is not signalling that.

I think in a theoretical world or in the current world without a capacity payment, yes, the market price will rise and start to signal the need for investment. But I think there are also some potentially game-changing technologies out there that would make looking at a CCGT investment even now, even if the market was rising, difficult. What I mean by that is we don’t know what the pace of renewables investment will be. If that is faster than we expect, then it will squeeze out the load factor of a CCGT. You could build one, have it on the bars in 2020 but then find it is hardly running in 2030 or 2025. We have seen, for example, in some countries in Continental Europe, and Germany is one of them, the massive growth in solar. Now, obviously today is not a good day for solar in this country, it is raining, but we have seen how it has grown very substantially and there is 25 gigawatts of solar in Germany now. If we had the similar intervention in the UK, could we see big volumes of solar also as the costs of solar are coming down? I think what we are facing there is a market price risk and, as Volker said, the market will signal that so that will be okay. But there is also a technology risk that would inhibit or add risk to an investment in a CCGT. Therefore, I believe that a capacity payment is a good way to solve that issue. Having said that, the capacity payment, therefore, needs to be put in place sooner rather than later to make sure that investors do have certainty and can get on and invest.

Chair: Okay, so I had better get back to nuclear. That was my fault for doing that.

Q28 Ian Lavery: The Energy Minister, Charles Hendry, said he was disappointed by the withdrawal of RWE and E.ON from this venture, but he also said that it was an excellent, ready-made opportunity for other investors. Reports have it that there are interested investors from the state-owned industry in China together with the Japanese, and also, I believe, Rosatom in Russia. What in your view would be the characteristics of potential buyers?

Dr Cocker: Well, we are running an M&A process and I think you will appreciate we need to have confidentiality around that M&A process. But let me pick up on some of your points.

First of all to Charles Hendry’s point that this is an excellent investment opportunity, we agree with that. We believe that the team we have created at Horizon has done a very good job to develop the opportunity over the last few years, and particularly with Wylfa the local community is very much on side and very, very supportive of the investment. We believe we have created a great opportunity there. Indeed, when we made our announcement, we both went to Gloucester to announce it to people face to face because they have done a great job and we appreciate that we are now putting them through a period of uncertainty. One of our colleagues went to Wylfa or to Anglesey the second day for exactly the same reason. We believe there is a great opportunity here.

Timing wise, because we have not yet made a technology decision, we have created the opportunity to bring forward the most potential interested buyers by not narrowing it down to one technology or the other. We know that any buyer will be interested in EMR and the UK institutional frameworks and, therefore, we are working closely with DECC to ensure that we can provide the buyer with that information and access to DECC. We also know that any future owner of Horizon will need to assure not only us but the Government that it would run Horizon with the utmost safety standards. We have all of those points in mind through the sales process, but I would not like to comment on individual countries or individual potential buyers. We are running a professional sales process with external support, we will run with that and we will do that as well as we possibly can.

Q29 Ian Lavery: I would like to press you on that if that is okay. Two companies in Horizon, world-class reputation, plenty of finance, think this is a fantastic opportunity for others, yet you yourselves bailed out. Has there been any potential buyers come forward to Horizon from both inside the EU and outside the EU?

Volker Beckers: Sorry, the question can only be is there interest in the market and the answer is yes, there is.

Q30 Ian Lavery: That might be your question but I did not ask that question. I am just wondering whether there have been any interested potential buyers from inside the EU or any organisation, state-owned or private, outside the EU.

Volker Beckers: I think the point we tried to make here is we commenced the process a few weeks ago and we have interest. We are now in conversations with potential buyers. I think it would be absolutely premature to say whether it is European or nonEuropean and if it is non-European, where it comes from.

Let me just summarise this briefly. We have probably in the UK together with France potentially the most advanced framework. We have gone through the GDA process, generic design assessment. With Horizon we have two technologies backed in the process so a potential buyer has the maximum flexibility to choose either technology. You have a team that has done all the site investigation work that is necessary, so any investor can hit the ground running and has effectively bought into three years of development. If there isn’t any interest, if there wasn’t, and I do not believe that is the case, then there was not any interest in nuclear, but that is not the case. We see that Wylfa is regarded-and we keep saying this and it is true-if not the best site, it is the second best site and certainly one of the best we have in Europe. Clearly, we need to wait until the process is finished. We have decided to appoint an adviser who is facilitating the process for us. We have just agreed on the information memorandum and then we will have the conversations and management presentations with potential buyers. Then I think we will both be able to answer your question more precisely, but it would be premature to do so today.

Q31 Ian Lavery: If another company goes bust, I think you would be an ideal politician because you spoke for five minutes and did not answer the question. Can you answer the question or are you just not prepared to answer it?

Dr Cocker: No, I think both of us are saying we are running a process and that process involves confidentiality. That is the way all mergers and acquisitions processes are run. Newspapers will speculate but we will not.

Chair: We are running out of time because the Minister is outside waiting to come in. Albert, you just wanted one last quick comment.

Q32 Albert Owen: Just on that, the market is likely to include non-European parts to it that are showing an interest and even if you went forward with your joint venture then you would have outside European help if you chose Westinghouse, which is a Japanese company, and some of the sovereign wealth funds may come from outside the European Union. Surely the likely scenario is that you would have a make-up of a consortia that has a European aspect to it and has a non-European aspect to it and has companies that are not directly involved in nuclear, investing cash in it. That is a likely scenario.

Volker Beckers: It is a possible scenario, yes.

Q33 Albert Owen: You would not be worried as a lay person about whether there was an international consortia, which had European and non-European parts to it?

Volker Beckers: What constitutes a credible nuclear operator? We talked about the money you need to make these investments. You have to have experience in operating nuclear plants safely and securely and you need to understand the technology. If they do have that expertise the answer could be very much yes. But again we are speculating on this. I think we need to go back to capabilities and experience rather than nationalities. I think that is important, that is what we need to test and that is why DECC is also part of this process. We keep them informed about the process and how it has panned out, and indeed we will make sure that Government is fully informed about potential buyers.

Dr Cocker: I think just one thing I would add is the regulation requires that the site licence company, in this case perhaps Horizon Wylfa, has clear capabilities to run the power stations, and that site licence company would obviously be based in this country. There are some very clear rules governing how we operate in the UK to make sure we protect that and secure that.

Chair: Phillip, do you just want to raise one more topic very briefly before we go?

Q34 Dr Lee: Do you think the Fukushima incident was a nuclear accident?

Volker Beckers: A nuclear accident?

Dr Lee: Do you think Fukushima was a nuclear accident?

Volker Beckers: I must admit this is a difficult question and I will explain to you why I think it is a difficult question. If you say it was-because I need to interpret your words-are you saying there was human error involved and it was-

Q35 Dr Lee: I think it is quite a simple question. Was it a nuclear accident or was it not?

Volker Beckers: Let me try to answer this. When we looked at this disaster and where the earthquake took place, we saw that there were other stations closer to the epicentre than Fukushima was. Why did it happen at this particular station? Because it was a flooding event and the power station was not designed for that potential flooding event because of the tsunami.

Q36 Dr Lee: In the interest of brevity, you do not think it was a nuclear accident?

Volker Beckers: No, it was caused by that.

Q37 Dr Lee: So it was not a nuclear accident? The reason I ask is in the context of all these decisions you are having to make, and we have touched upon how it has affected your investment here, and the decision in Germany vis-à-vis nuclear. If it was not a nuclear accident, why did Germany change its position on nuclear power?

Dr Cocker: I think Fukushima was declared a nuclear accident by the Japanese authorities and by the nuclear authorities.

Q38 Dr Lee: I am not so sure that is true.

Dr Cocker: The accident at Fukushima was declared an accident. I cannot remember exactly which level of nuclear incident-

Q39 Dr Lee: Forgive me. I look at your CV, sir, and you have an impressive mathematical background, so let us deal with evidence here. This was not a nuclear accident. This was a disaster caused by the failure of back-up diesel engines, which were flooded. I put this in the context of all these investment decisions, which are very difficult to make. They are particularly hard to make if you do not deal with evidence. Nuclear power has not, in any way, killed as many people as, say, hydro-electricity in history and all of this fear of radiophobia, as it is called in Germany, is driven by this belief that Chernobyl created significant health problems and there is no scientific evidence of any health problems from Chernobyl. None at all. I am just asking you, how can you make decisions if you do not deal with proven evidence.

Dr Cocker: May I say two things? I think first of all the way the UK authorities dealt with the aftermath of the accident by appointing the Weightman Inquiry was very positive and-obviously there were some good recommendations, which we have taken into account in our developments at Horizon, and also I think extremely interestingly public support for nuclear in the UK has recovered now to pre-Fukushima levels. I think it shows the confidence of the approach taken.

The German decision was made by German politicians for their own German popular opinion and German politics. We took a decision based on the cash flow of E.ON, which has been impacted by a number of factors, and we had to decide what we should invest in in this country. We said right at the very beginning that if Fukushima had not happened, would we have been making this decision? We do not know, but a number of factors have driven our cash flow in E.ON, which therefore drove the decision in the UK.

So on your point evidence, the evidence for us was cash flow. Last year our profits were down by 3.5 billion as a result of the three effects that we have talked about.

Chair: I am sorry, but we have to call it a day. We are getting into a whole big area of new territory. This inquiry will run for some time. There are some other issues that we might want to return to you about in due course. We are taking evidence again in September on this same subject. Thank you very much for coming in this morning. It has been a very useful and interesting session for us and for other people.

Examination of Witnesses

Witnesses: Charles Hendry MP, Minister of State, Department of Energy and Climate Change, and Hergen Haye, Head of New Nuclear & Strategy, Department of Energy and Climate Change, gave evidence.

Q40 Chair: Good morning, thank you very much for coming in. Sorry we are running slightly behind time but you will appreciate there is quite a lot of interest in this particular subject right now. I will skip any formalities. You are a regular and welcome witness for this Committee. Could you start by saying why you think RWE and E.ON decided not to go ahead with their plan to build nuclear power stations here?

Charles Hendry: I think the overriding factor was the situation on their own corporate balance sheets, the effect of the nuclear levy and Germany, the fact that they had expected to have lifetime extensions to pay for that, but those lifetime extensions were taken away and that led to a much more capitally constrained situation. Everyone looks I think at, for example, RWE, which is looking at making major savings in the course of the next couple of years, in particular, I think it is €7 billion worth of savings in the next couple of years. There was a very clear sense of direction that they were rather too capitally constrained to take forward the work here.

Q41 Chair: Perhaps regardless of what the reasons were, although those clearly are very important elements in the decision they made, it does leave us with a bit of a problem, does it not? It has driven a coach and the horses through the Government’s hopes and intentions that there would be a good chance of replacing the 16% of electricity generation that comes from nuclear at the moment.

Charles Hendry: No, it does not. I think what we have are two sites, which are very good potential sites for development. Wylfa, I would say, is one of the best sites you are going to find anywhere in any country in terms of their skills base and, in that case, the enthusiasm of the local community. Oldbury is also good but I think Wylfa is exceptional. There are other people who we believe are looking at both sites, who we hope will come forward to take forward that investment. This was always a programme that was expected to deliver 2022-2023, and there is plenty of time for that to be delivered on that timescale. I remain firmly positive about the opportunities for taking this forward. It was certainly disappointing. I do not wish to hide that in any way but I do not think it derails the Government’s nuclear programme.

Q42 Chair: It may not derail it but it hardly accelerates it. All the signs now are that we may have some hesitation on the part of EDF and there have been rumours about whether Centrica are going to stay in the game. Does the Department have any contingency plan in case you find it is not quite so easy to sell Horizon and that EDF are starting to think perhaps they have different political priorities?

Charles Hendry: First of all we see, as I say, significant interest coming forward for new companies to take forward the work of RWE and E.ON and that could lead to an acceleration of that programme. There may be other investors who have additional resources, different skills that they can bring to that so that it could happen on the same timescale or faster. Much of the work has been done to facilitate that investment, all of the planning issues in terms of reforming the planning system, the generic design approval of process, which has been gone through, and the regulatory justification, assuming they use one of the two reactor designs already approved.

So this is a project that is ready to run with, so this does not necessarily mean there needs to be a delay. I think we could see it maintained on the same timescale or possibly even scope for some acceleration.

EDF are also very heavily committed to this market. They have spent many, many hundreds of millions taking forward their investment. They have spent billions in buying the sites in the first place, so this is a very strong area for them to take forward, and I see no indication at all of their pulling back in their enthusiasm for the UK.

Q43 Chair: When do you think Horizon will be sold?

Charles Hendry: It needs to happen soon. I think there is a window over a few months when serious interest would need to be shown. The workforce is being maintained in Gloucester, but if the process were dragged on for a long period, it is inevitable that some of the specialist skills there would start to drift away. I do not think we should be in doubt that finding a new buyer is an urgent requirement-that has been taken forward with urgency by Nomura as the financial advisors to Horizon. Certainly, the Government is very keen to talk to any serious investor.

Q44 Chair: What can the Government do to try and facilitate all that?

Charles Hendry: What we have always said is that we will remove the barriers to private sector inward investment, so if there are additional areas where that needs to be done, we will continue to do so. We have taken forward the work of the last Administration, in terms of some of those regulatory barriers. We are now introducing the legislation on market reform, which will, I think, provide the final stage of the necessary reassurance and framework. That Bill, which will be published shortly, will be scrutinised by this Committee. There will then be much greater clarity about exactly how the process will work.

Q45 Laura Sandys: Carrying on from the Chairman’s point, we just had evidence discussing in some ways some of the commercial considerations, and that includes obviously the cost of capital, the contractual relationship with the counterparty, which I think is seen as adding additional cost and uncertainty to the overall investment profile. Dr Cocker used an interesting term-"patience of capital". Have you factored the patience of capital into the risk profile of these other consortia coming forward? It is not just our regulatory structure that is going to determine this, is it? It is also whether we have Moody’s approval, which is looking at the profile of these companies. We have the competing investment requirements, both across Europe and globally. I do not know, but from our previous evidence just now it seems as if we are going to have to develop real certainty to secure that investment. Are you not quite concerned about this particular sort of analysis of what this market looks like?

Charles Hendry: I think we recognise very clearly the challenges that are there, but I think we are putting in place a mechanism that deals with it. It is absolutely evident that the capital intensity of a nuclear plant or an offshore wind plant is much greater than a gas plant where the up-front capital costs are lower although the running costs for gas will be greater over time. We recognise that each of these has a different investment shape.

On the counterparty side, we have put forward the proposal that we think is most likely to deliver the investment and also be comfortable with European State Aid rules, and we have made submissions to the Commission to ensure that we are within the rules on State Aid. I think that that structure is most likely to deliver, but we made it very clear that we recognise that there are concerns in industry here. One of the reasons why we were so keen that this Bill should go through pre-legislative scrutiny by this Committee is exactly to ensure that we get the widest possible support for the package of measures that we are putting forward.

We also recognise the investors, who are predominantly major international companies, can invest anywhere in the world and they need to find something that is more attractive about the UK regime than elsewhere. So the whole basis of the EMR structure is to give assurances on the longer term for investors that those investments will be justified and will pay off.

Q46 Laura Sandys: If you flip it round the other side and consider value for money for the taxpayer and the customer, at this moment we have the evidence of two consortia. Do you feel that that is creating enough of a competitive environment or do you think we might end up having to pay? It is the balance between paying over the odds to secure our future generation. Are you taking measures to attract other players into this sector because obviously just two consortia with the pressure of, let us say, the credit agencies as well, strikes me as being a little bit vulnerable to a less than open competition.

Charles Hendry: I would not expect it to be one of the other two consortia that would take over Horizon. I think it would be new investors who come forward, so we would be back to three consortia in that process. Part of that competitive benefit comes from having two reactor designs, so we hope the competitive tension with that will help to bring down the cost of developing and that people will realise they cannot simply take it for granted, an assumption, that whatever price they happen to put it in, the Government will pay. We simply will not. We will not sign up to a contract that we believe is not good for the taxpayer- the bill payer.

At the end of the day we do believe that nuclear should be the lowest cost, low carbon technology on a large scale. Therefore the cost of that should be reflected in the price that goes forward.

Q47 Ian Lavery: The situation this morning with EDF, or the reports this morning about EDF, is greatly concerning, as is the fact that Horizon withdrew from what they had planned at the UK’s Wylfa site. What do potential buyers of Horizon have to demonstrate to DECC before you would allow the purchase to go ahead because I think you say to yourself, Minister, that you are disappointed, however you believe that it presented a great opportunity for other companies to come forward and you have reiterated that fact this morning?

Charles Hendry: Yes, we have been clear that any potential investor needs to be able to meet all of our safety and security requirements. They also have to be able to demonstrate that there is a benefit to the United Kingdom more generally. As part of a consortia they have to have a partner who has experience of nuclear generation, and so we do not think this is something that can be done by an organisation who has no expertise in that sector, and we will judge them on exactly the same criteria as we have judged those who are current participants in the programme.

Q48 Ian Lavery: Does it matter where the companies are based, whether it is in the EU or whether it is outside the EU? Does it matter as far as DECC is concerned?

Charles Hendry: Essentially not. What we are looking for are companies that have real experience and expertise in this sector. We have always recognised that there are not British companies that can take this forward. In two years as Minister I have not met a single British company that had either the capability or the will to take forward a nuclear programme as the lead partner. Clearly we have Centrica, which is in there as a smaller partner, but we therefore need to look at international investors, as we do in many other sectors of the energy market. As long as they can satisfy us on the safety and security issues and their skills as an operator, then we are happy to talk to people and to see how that can take us forward.

Q49 Ian Lavery: The general public will be looking at this very closely, and rightly so because of Fukushima and what happened there. If the reports in the press are correct that there is interest from Guangdong in China, the state-owned nuclear company, together with Toshiba in Japan, where Fukushima actually occurred, people will be extremely concerned that perhaps nuclear power will be produced by a nation, as in Japan, together with China, which has relatively little knowledge in terms of nuclear power generation. The general public will be extremely concerned if that is the case. Is there a difficulty, as far as DECC is concerned, with perhaps Russia, perhaps China, perhaps Japan, coming into the UK and building new reactors?

Charles Hendry: There is not an objection in principle to their being involved in a consortium. I think if we look at the role that Toshiba might play, and I am not going to get into the particular details of any interest that may be being expressed, it is the owner of Westinghouse. Westinghouse has gone through the approvals process with the National Nuclear Installations Inspectorate, so their reactor design has been approved or is in the final stages of that. So that is where their expertise could potentially be brought forward.

In China, there are different companies who have experience of building dozens of nuclear power stations on time and on budget, and so there is no suggestion that these are companies that do not have expertise in this sector. They have extremely well proven expertise in this sector and in looking at how we take this forward in the United Kingdom I think we should be guided by where that expertise has already been proven.

More generally, we have already seen significant investment from companies in both countries into our energy sector. For example, a Chinese company has bought part of the distribution network, bought the old E.ON distribution network and a multi-billion pound investment was put in place there. So as long as we can be satisfied by any purchaser, wherever they come from, on the safety and security issues then we do not rule them out because of where their origin.

Q50 Ian Lavery: I am sure you understand the thought of the British public in that and what decision will eventually be made. Would you prefer private or state-owned companies to take over Horizon?

Charles Hendry: I think that it is likely to be a consortium that would come forward. We believe the private sector is very good at delivering on major infrastructure and major energy projects but we have also, quite actively, sought investment from sovereign wealth funds, which are clearly linked to government wealth in different parts of the world because of their desire to invest in low carbon technologies. We hope the structure of the system that we are putting in place would make it attractive for them to come in.

The more that this can be done by bringing in investment from overseas and doing this in a way that reduces the cost of capital, then the greater the benefit we believe is to the UK consumer.

Q51 Ian Lavery: Finally, if there is not any private, public or any interest or any eventual buyer for Horizon, does DECC have contingency plans for the future?

Charles Hendry: If there is not a buyer?

Ian Lavery: Yes.

Charles Hendry: We have always had an approach of saying we want a balanced energy policy and that would be some nuclear, that would be some major roll-out of renewables. It would be carbon capture for hydrocarbons and we need some new gas in there as well. We are clear that in the event that we cannot get as much of one of those as we wished then we can still have a stable policy. We are not over-reliant on any particular technology but we do remain, as I say, very committed and indeed very positive about the prospects of finding a new buyer for Horizon.

Q52 Chair: One of the problems with the nuclear though is it is a bit exposed to what happens around the world, isn’t it? We have had an industrial accident in Japan, with a big setback, a decision in Germany taken, I think, for domestic political reasons, the risk of a change of Government in France, all those three things have a direct impact on the level of investment in nuclear in this country. So however good the intentions of the coalition are here, we are exposed in this particular technology in a way that perhaps we are not for some of the other renewables to what happens in countries quite a long way away and that are completely outside our control.

Charles Hendry: I think that is inevitably the case but I think that if we wish to see nuclear as part of the mix going forward that is a challenge that we have to accept. I think it is too early perhaps at this stage to know exactly what President Hollande’s approach is going to be to this. But I think at a time when he wants to see more active commercial and business growth then this is one area where international opportunities provide a great opportunity for that growth, and so we would hope that he would be a President who would encourage that continued investment overseas.

It is undoubtedly the case that decisions in Germany have had an impact here, but at the same time we have seen other countries, many of them in Europe, that have decided to continue with a new nuclear programme. Many of them are looking at the model being developed here as the approach that they should be looking at in the future where there is no government subsidy but we create a market framework to facilitate that investment.

Q53 Chair: It does look a bit as though we are hoping for some friendly Russian oligarch with a partner with a bit of nuclear experience to come along and bail us out, doesn’t it?

Charles Hendry: No, I think what we are looking for is a consortium where there is real proven expertise in this sector-people who see the opportunities, which are here, as being very alive and very real, and who want to take forward that investment as a business case. That has been the work of the last Administration, it is the work that we have taken forward and I think if you look at what has been achieved in just five years it is quite extraordinary that since the 2007 White Paper, which put nuclear back on the agenda for the first time, we have now moved to being one of the most exciting places anywhere in Europe and one of the most exciting places in the world for new nuclear investment. So an immense amount has been achieved in five years.

Where one looks at what we are talking about in terms of 2025 and potential 16 gigawatts for investment, that is what has been achieved in five years and so in the next 13 years we believe there is every realistic reason for being able to take this forward.

Q54 Dr Whitehead: At the moment we have one company with serious unannounced plans to develop nuclear reactors and we have, I think, eight sites as possible development arrangements. The NuGen consortium has not announced any concrete plans, and say they will not do so until 2015. The Chief Executive of one company that is still in, GDF Suez, said recently that the Government’s plans to support new nuclear plants through a Contract for Difference in carbon price were not enough and something is missing. Do you think that apparent almost complete lack of interest in developing nuclear sites that is around at the moment has anything to do with that or is that an unfair thing for the Chief Executive of GDF to have said?

Charles Hendry: I think if you look at the full comment and the full interview of Mr Mestrallet, then you will see that what he was saying is exactly what we are delivering. He said that what they now need is greater clarity on exactly how the contracts for difference are going to work. They need clarity on the counterparty elements of that and that is exactly the process that we are going through this year. We do not have any difference with him in terms of the true substance of his comments. He recognised we have done a great deal to set out a general framework for market reform, but in the course of this year much more detail is going to be necessary, and at the end of the day it is going to be how the strike price is determined which will determine whether we get a positive final investment decision.

I must take up your comments in terms of where you think NuGen are. I am seeing significant interest from NuGen in taking forward the Cumbrian proposals for development. I think they are very active and very committed investors in this country. I think that is a very significant project. EDF is in main league with Centrica, we have a second consortium, and I think we will end up with a third consortium taking over the Horizon project and we will be in a strong position moving forward.

Q55 Dr Whitehead: Do you think the clarity that was sought, certainly as far as contracts for difference are concerned-I think we all accept that is a very important element of nuclear power generation support in the future-might have been taken from the impact assessment to the White Paper which said that contract for difference was a superior way of organising such payments than a premium fit because the price risk is borne by Central Government balance sheets, and that was the reason for choosing it. That is not the case now, is it?

Charles Hendry: At the end of the day the National Grid would be our delivery agent for taking that forward. We believe that that was the right structure. They have the expertise, they have the knowledge of the market. They are the people who we felt were in the right position to be the deliverer of this policy. But at the same time what needs to be clearer through that process is that this is not a policy that can be changed at the whim of Government. This will be a legal contract and so the concern that they have is the longevity of it and the consistency of it. What we need to be going through in the final stages in the course of the next few weeks is making sure that people are comfortable with that process.

But we are clear, and this will be part of the Energy Bill assessment that predates your scrutiny, that there are different ways of delivering this and we are very keen that your Committee should look at those different mechanisms and be comfortable as well that we have this approach right. We believe we are right on it but we are keen to see that taken forward in the most constructive way.

Q56 Dr Whitehead: If we are now clear, who will the counterparty be for CFDs?

Charles Hendry: These are legal contracts, therefore no future Government can simply change that without being subject to legal action, but the delivery partner is National Grid and that will be divided into separate organisations; one for its trading activities and one for its management of this process.

Q57 Dr Whitehead: They will sign a counterparty form, as it were, and be the counterparty as far as risk is concerned in the delivering of CFDs.

Charles Hendry: So the contracts are with National Grid.

Q58 Dr Whitehead: They will sign a counterparty agreement ensuring that CFD payments are honoured over the next period?

Charles Hendry: Although that does not fall on their balance sheet. They are not liable, so if the policy was changed by a subsequent Government, the liability would not fall to National Grid so-

Q59 Dr Whitehead: Who is liable then?

Charles Hendry: If a future Government was to change those contracts then legal action would be taken against the Government if that was what the companies wished to do.

Q60 Dr Whitehead: So the Government is liable?

Charles Hendry: Although we have not signed the initial agreement, Government would inevitably be liable for a change of policy.

Q61 Dr Whitehead: So the Government would be liable, is that right?

Charles Hendry: The Government is ultimately liable, and, Hergen, do you want to add more to that?

Hergen Haye: The proposals will come forward with the Bill. We have a model of such contracts and counterpart signing parties, which will ensure that we have to make sure there is no risk to the investor. If there is a price agreed, that price needs to be delivered. If a Government, for whatever reason, changes all of that then there is a question one has to ask; who deals with that risk? That is one of the key considerations we need to evaluate in any contract that has been signed, as many contracts are signed where you have change of law provisions, and so on, where we deal with that risk.

Q62 Dr Whitehead: So the Government is not liable?

Hergen Haye: The Government probably would take an amount of risk.

Q63 Dr Whitehead: How much risk?

Hergen Haye: I would say let us wait until the full proposals are there-

Charles Hendry: This is the work we have been going through over time because we recognise that within industry they are nervous about where the risk balance falls. Understandably National Grid would not take on this responsibility if they would be, themselves, liable for a future Government changing the policy and reneging on a contractual agreement. We, as Government, have no intention of changing the contracts. We believe it is important that we give long-term certainty.

In the event that a future Government should decide it wished to tear up that agreement and to say that, "No, sorry, that is not an acceptable way forward", then the Government would be liable for legal challenge and therefore for the legal losses, which the company might incur.

Q64 Dr Whitehead: Do you think the position that you have just put forward is clear for future nuclear investment?

Charles Hendry: I think it sets out the right framework. It is also something that we are going through the process now of discussing it with the European Commission to ensure that we get their approval for that process. But there is still, and this will come out in your investigation into the Bill, a preference within industry that we should look at different models for doing that. We have not closed the door on that. We have set forward what we believe is the best model, but we have said that we will continue to look at other ways to see if there is a better way of providing the assurance that they need.

Q65 Dr Whitehead: Is it your intention to provide differential strike prices for nuclear and other forms of low-carbon generation?

Charles Hendry: Yes, and we recognise that different types of technology will have different costs. That is why we are not going straight to an auction. We believe it would be impossible to have an auction on this at this stage because comparing an offshore wind farm with a nuclear facility is going to be virtually impossible. If you add into that a CCS plant, the technology of which has not yet been perfected, it becomes completely impossible. We would like to move to that at some point in the 2020s. We think an auctioning structure is better at that point but we recognise that different technologies will have different costs but we would expect nuclear to be cheaper than others.

Q66 Dr Whitehead: So there will be differential strike prices?

Charles Hendry: Yes.

Q67 Dr Whitehead: That is okay with State Aid, is it?

Charles Hendry: This is the process we are going through. We believe it should be appropriate. We believe it is right that we should reflect the different costs of different technologies, just as we have with the renewable obligation at the moment. Different technologies have different support through the RO, different renewable sources, and that is entirely acceptable within the EU State Aid scheme decarbonising. If they wish to see us achieving very strict carbon production targets, we have to build low carbon plant.

Q68 Chair: To go back to the question of the counterparty, I think you said that the Government might be willing to consider some of the concerns expressed. My advice would be that you should start considering that pretty soon. We have just heard in the earlier part of our evidence session this morning from two of the largest players in this industry, who expressed absolutely concerns about the counterparty, and I do not think I am exaggerating- we will look at the evidence later on-in saying that they think the choice of this company to be the counterparty is an impediment to investment.

Charles Hendry: We have already been having those discussions over many months. Those are continuing. But what we need to be clear of is the system that we put in place is one that will satisfy the European Commission. We believe that the approach we are taking is most likely to be acceptable under the rules on State Aid. The views that some in industry have put forward we believe may be more likely to fall foul of those rules. As I say, we are willing to look at other approaches. We have had those discussions, they are continuing with industry, but as we go through the PLS process we hope that that will be something that can be looked at as well.

Q69 Chair: Are we saying that the European Commission may be forcing the British Government to make decisions about the counterparty, which are directly contrary to those that the industry say are most likely to promote investment?

Charles Hendry: Inevitably there is a difference at times between what industry wants and what the Commission believes is appropriate under State Aid rules. This is not something that applies just to nuclear or to energy but to all aspects of Government’s relations with business. We have put forward the package that we believe most complies with EU requirements and industry have other thoughts on how they would like this to be dealt with in the future. We will try to find the best balance for that, which gives the certainty and the comfort to investors but does it within the framework of State Aid rules.

Q70 Chair: I do not think you will be surprised if I say I think there will be serious alarm politically if it appears that some interpretation of EU State Aid rules prevents Britain from having the best possible market structure. All kinds of bribes offered to various sources of energy and electricity generation would seem to escape the notice of the European Commission. Why on earth is this rather important aspect of our quite sensible market reforms going to run foul of the European Commission?

Charles Hendry: We are putting it forward in a way that we believe it will not fall foul of those rules and those discussions with the Commission are now happening. But at the end of the day we have to be absolutely clear that legally we put forward a package of measures, which will not fall foul of them, otherwise we will be in contempt of those rules and they will not be able to go forward. These rules do not just apply to nuclear. These are EU rules on State Aid where Government is involved in putting in a structure, which could be seen as supporting different industries.

Q71 Chair: So a counterparty whose credit rating was beyond reproach is not acceptable to the European Commission, but one that may be so dubious that some people do not want to do business with it is okay?

Charles Hendry: What we are saying is we have started those discussions. We need to find out where their red lines are. We need to find out where they have concerns about this process. What we want to do is to end up in a situation that will satisfy the investors and that will satisfy the Commission’s requirements. These are not rules that will be uniquely imposed on Britain. These are rules that would be imposed on any such investments anywhere within the European Union.

Q72 Sir Robert Smith: Can I just clarify who pays the Contract for Difference?

Charles Hendry: The Contract for Difference is linked into the wholesale price and when the wholesale price is high either less is paid or it is clawed back, and when price is low, more is paid. At the end of the day the investor gets a certainty about what they are going to get.

Q73 Sir Robert Smith: Yes, but where does the money come from?

Charles Hendry: At the end of the day, this is something that is charged to consumers because we need to get £100-plus billion of new investment in our energy infrastructure and in the event that we do not secure that investment the cost to consumers is going to be absolutely prohibitive. We know what plant is closing in the course of this decade. We lose about a quarter of our coal plant, we lose all of the old oil plant. We are losing most of the nuclear plant and Sizewell B is the only one still guaranteed to be operating post 2023. We should have seen more investment in a new plant by now.

Q74 Sir Robert Smith: Who decides how much the consumer pays to make it balance the books?

Charles Hendry: That is what the process of the CFD is going to be about. The intention is that we strike a price, which we believe secures the investment in the new plant and all types of different low-carbon plant, it is not just obviously about nuclear, and does that in a way that is at the best cost to consumers. That needs to reflect the costs of the different technologies, that is why the strike price would be different for different technologies but the purpose is to try and do this in a way that reduces the cost of capital because the structure of it means that the companies can borrow at a cheaper rate than they could otherwise borrow and therefore it brings down the cost to consumers.

Q75 Sir Robert Smith: I am just trying to understand where the risk lies if something is misjudged. Where does the cash come from?

Charles Hendry: The cost for the plant is going to be borne by consumers. There is no way that Government will do this. The investment itself, the capital, will be raised by the companies but then the CFD provides a pricing structure and therefore at the end of the day this comes through to consumers.

Q76 Sir Robert Smith: But the CFD takes away the risk of the market price but who guarantees to pay that difference?

Charles Hendry: The structure is therefore a system whereby there is a price that is guaranteed. They know what they are going to be receiving and that is put into the pricing structure on bills. The market can decide between security and supply and affordability but with the investment that we need to be securing in low carbon we need to have a mechanism that factors in the cost of carbon. Part of that is the carbon floor price, which is part of the market reform proposals. Part of it is also the Contract for Difference, which will facilitate the investment in low-carbon technologies. Without that this investment cannot happen and without that investment the consumer is left high and dry because there will not be enough generation to meet demand.

Q77 Sir Robert Smith: I understand all that thinking but the investor that is going to build the plant, that is relying on a Contract for Difference, needs to know at the end of the day someone is going to hand over the cash.

Charles Hendry: Yes.

Sir Robert Smith: How can they assess the risk of that cash default or not?

Charles Hendry: This is a contract, so this is not a Government policy, it is not a whim, this is a legal contract.

Q78 Sir Robert Smith: Yes, but if you do a contract with someone who goes bust you do not get paid. A contract has a risk premium on it working out how robust the finances are of the other side of the contract, and if you are transferring the risk-

Hergen Haye: The price is set for a period of time. Fluctuation, that risk of fluctuation, is what it is all about.

Sir Robert Smith: That is to attract the investment.

Hergen Haye: If it falls below, it will be made up between the contractual parties-it will be settled between the different counterparties.

Charles Hendry: There is a process called the State Settlement Process, which is to ensure that the investors get paid, to ensure that the process is run and therefore that risk is-

Sir Robert Smith: So levies on bills.

Q79 Dr Whitehead: Is it fair to say the price risk is borne by Central Government balance sheets then?

Charles Hendry: No, it is not. The consumer bears the risk. At the end of the day either Government has to fund the plants to be built, which is clearly not something that we can do, or it has to be something where at the end of the day consumers pay. What we have sought to do is to find the mechanism, which delivers us a security of supply, moves us in a low-carbon direction we need to do legally, and does that at the lowest cost to consumers. That is also why we have so much focus on energy efficiency, in order to try and reduce the amount of electricity that people are going to need.

Q80 Dr Whitehead: Forgive me, but what is the mechanism then?

Charles Hendry: What is the mechanism-

Dr Whitehead: You just said you sought to provide a mechanism whereby consumers underwrite and bear the price risk, since it is not borne by Government balance sheets. What is the mechanism?

Charles Hendry: This is the process that National Grid delivers. It is delivered through the strike price. The system operator delivers that system, i.e. the National Grid. That delivers a guaranteed rate of return for each unit of electricity produced and that is then charged through the system on to consumer bills.

Q81 Dr Whitehead: Can we be clear then; is the price risk now borne by National Grid?

Charles Hendry: No. Consumers bear the risk.

Q82 Dr Whitehead: How can consumers, in the abstract, bear a price risk?

Charles Hendry: Because of the mechanism, the settlement process, ensures that, once it is agreed, it is charged on to bills and so according to the volume, which is a different source of technology, which are brought in there, that is transferred into the billing system. At the end of the day, the cost of new plant is borne by the consumers but it also does this in a way that ensures that is set at a predictable level for the investors.

Q83 Dr Whitehead: So the billing system bears the price risk?

Charles Hendry: If the price is set at the wrong level, then either the investment does not go ahead, but the process of discovery, the process of setting the final investment decision, is designed to find the right price at which that investment will happen. That is carried out by the system operator. They have the greatest expertise in doing this. Their job is to set that price, to strike that price, and Government will be responsible for finally making decisions on some of these areas, but at the end of the day the operator sets the price through the settlement process, and that is the way in which it is transferred on to individual bills.

Q84 Barry Gardiner: Can I ask you to engage in a thought experiment with me here. You know there are energy companies that make their pitch to the consumer through the very fact that they are wholly renewable, not nuclear, not coal fired, not fossil fuel and so on, and they try and attract people over to them in order to have some sense of coherence between people’s principles and the energy that they are buying. What happens if the entirety of the British public suddenly go German, suddenly say, "Goodness me, we do not want to have anything to do with nuclear. We all want to go over to this company over here". I will not mention it by name because it is not my purpose to big up good energy. They all go over to a non-nuclear renewable supplier and yet all these nuclear power stations are still churning out energy. Who is going to pay?

Charles Hendry: Your world is fanciful.

Barry Gardiner: It is; it is a thought experiment only. But of course what it does do is it exposes the skeletal architecture of the argument and of the different risks that there are brought to bear.

Charles Hendry: No, it doesn’t because the company to which you did not wish to refer would not be in a position to take on customers that it could not service and there would not be enough renewable electricity generation to meet the demands of 60 million people. That does not exist. Therefore they would have to have a massive programme for building plant, which would be more expensive, and those consumers would then decide, "Do you wish to pay much more for that renewable generation or do you wish to go for a different source of generation?" So what we believe is the right way forward for this country and for the industrial users, bearing in mind how much of our demand is industrial usage, is looking for electricity generation at the lowest cost.

We believe the system that we are putting in place enables nuclear to be part of that process and it does it at the lowest cost. Therefore the concept that all of those people will say, "Actually we want to make ourselves less competitive by going for a more expensive way of electricity generation" is fanciful.

Q85 Barry Gardiner: But of course there is technological change and we have heard about the rate of investment in renewable technologies increasing and how price comes down accordingly. Indeed I think you talked about that in front of this Committee before. There is the possibility of technological breakthrough, there is the possibility that the public may shift, not simply because of high-minded principle but because of low carbon and the financial incentive and benefit that they might be able to gain elsewhere. So the key thing here is are you banking against technological change in terms of such a switch in demand for nuclear taking place? If there were such a switch in demand for nuclear I think the fundamental question that we all want to know the answer to is who would pay the companies what Government has promised. It is a long time since I did contract law but usually that would be the counterparty. You seem to be telling the Committee that in this case it would not be the counterparty, it would be the Government.

Charles Hendry: The cost for the contracts is borne by the consumer. The consumer is receiving the electricity that is generated. The process that we therefore go through is one where we have a system operator handling those agreements but where the ultimate cost of that, through the settlement process, is spread across consumers. In order to facilitate the investment in plant where the payback is not in a few years but is in decades one has to have a long-term contractual arrangement. Historically these plants have tended to be built by Government who took on that risk directly because it was built on their own balance sheets, but if one is looking for a system where individual investors will be bringing forward that investment then they have to have a degree of certainty, not just for nuclear, but for offshore wind where similar issues arise and follow those-

Q86 Barry Gardiner: I understand. Let us have clarity then. I think I understand that you are saying that in a world, post 2030, maybe post 2035, new technologies may have come on and given us a far cheaper source of energy than nuclear could possibly provide, but, in order to get the nuclear investment into the market, Government will have promised, through the Contracts for Difference feed-in tariffs, a fixed price to the industry going forward. We will then possibly find ourselves in 2035, 2040 in a situation where those consumers who are now with those new technology companies, new generating companies, that have set up much cheaper provision, will still be paying back the old contracts that you had National Grid enter into.

Charles Hendry: Because one has to make a decision about new plant being necessary.

Barry Gardiner: I am not saying yes or no, I am just saying let us be clear that that is what is happening.

Charles Hendry: Absolutely. But we do believe that nuclear plant should be able to deliver the lowest cost of large scale low-carbon generation and therefore this should be a good deal for consumers. It is possible, completely possible, that a new technology will be developed, which none of us is yet aware of. Traditionally they take 30 years to come from operation to being large scale. Normally that is about the timescale that it takes. We hope that will happen, and we will see other technologies coming forward.

But the consequence of us not securing this investment is catastrophic for consumers. If we do not get investment in the new plant, which is going to be necessary, then it is going to be rationed by price because there will not be enough generation to meet demand. In those circumstances the consumer is the first person who loses so if we need to get new investment in plant one can forever put off those decisions thinking, "Well, you know, something better will come along if we wait another five years". We do not have five years. We need to get moving on this now to make up for the failure of investment and new plant over previous decades.

Q87 Sir Robert Smith: Crucial in the mind of investors is the fact that it is a contract that is protected by contract law and therefore cannot be reneged on when this new technology comes along.

Charles Hendry: This is a long-term contract for difference and so that gives them the certainty for a guaranteed period of years that this is the price that they will pay.

Hergen Haye: I think that is the key. It is not an indefinite contract so there will be a time limit to ensure it is sufficient to give that return on the capital but if we think about new technologies and route to market 30, 40 years to come, by that time most of these contracts probably we enter into now will have ended. It is also a gradual process so the first CFDs for the first few plants will be signed now. It is not that we are signing CFDs for all nuclear plants to come. It will happen when these plans come on stream, when investment plans come forward, equally for wind, for CCS, always sending the signal what we think low-carbon requirements for the UK long-term market are necessary to give us that margin, to have security of supply and to meet our carbon targets.

Charles Hendry: Then moving into 2020 and the process of auctioning, so that we can then be ensuring that we bring in the lowest cost low-carbon option for generation, which is necessary.

Q88 Sir Robert Smith: Given the setback in the nuclear climate, is the Government redoubling its efforts on CCS to at least make sure we get some low-carbon, big generating technology?

Charles Hendry: We are taking forward work across the sector for low-carbon technologies. We recently launched the competition for the CCS project, £1 billion up front for that. The contract for difference is an integral part of how we want to turn that from being a few pilot projects into a long-term industry because they need to know how they are going to get paid in the longer term for generating electricity with CCS. So that is a core part of that. Similarly, the work that we are doing on offshore wind to bring down the cost of offshore wind by 40% over the course of this decade is an essential part of the ambition because the extent of the roll-out has to link into the cost of the technology to consumers.

What we want to do is to guarantee the security of supply, we want to do it in a low carbon way, and we want to do that at the lowest cost to consumers, and that final part, lowest cost to consumers, is critical in all of this work.

Q89 Sir Robert Smith: What is your assessment of the consequence of Fukushima on the incentives we need for nuclear power in this country?

Charles Hendry: I do not believe it has changed it fundamentally. We have looked at, through the work of Dr Michael Weightman, who is the chief regulator, any lessons we need to learn. He submitted a report to Government, we are looking at how we need to take forward those recommendations but we should be in no doubt that this was 40-year-old-plus technology that was being used, that we have looked through the national policy statements at siting issues in terms of whether that needs to be addressed. We delayed the final parliamentary approval for the national policy statements until we had the initial recommendations from Dr Weightman so that we can take account of any changes, which should be necessary in that process. But I think that the situation, which applied in Japan, is very radically different from anything that could ever apply here. But we have, because we have put the onus on caution, made sure that we looked at this in a very careful way.

Q90 Sir Robert Smith: It has impacted indirectly on us through Germany in the sense that it is part of the calculations that have affected this consortium and their finances.

Charles Hendry: It did. I think Germany came to very different conclusions partly for historical reasons, but in terms of the technology that was applying at Fukushima that does not apply in the new reactors, which are being looked at here, the back-up issues in terms of back-up power supplies will be different here. The whole of the generic design approval process was delayed in order to take account of any changes to the design, which might be necessary following Fukushima. I think we have a very robust approach to assessing those issues, so that any new plant will be put in locations with suitable mechanisms in place to guarantee their longer term safety.

Hergen Haye: The switch-off of German nuclear plants was predominantly not because of direct safety concerns but more due to political concerns and no support for usage of the older plants in Germany.

Q91 Sir Robert Smith: Obviously with Japan switching off its nuclear feed, consumption of LNG is going up there, how much of an impact is that likely to have on our own domestic gas?

Charles Hendry: We are looking at this in our gas generation strategy because there are many new sources of LNG, which are becoming available, but at the same time significant new demands. What does that mean in terms of our gas strategy moving forward? How does that link into the development of shale gas? How quickly may that happen, if it happens at all? We need to be clearer about what we think is the long term security of gas. For example, if you look at Western Australia, the LNG export from Western Australia alone will be either the first or second largest in the world by 2020. So major new sources of supply are coming on, but we expect to see significant increases in demand in Germany, in Japan, in China, in India. So even in some countries where they will be looking at nuclear we also expect significant demand for gas too. This is all part of the gas generation strategy where we have issued a call for evidence and will be publishing our conclusions in the autumn.

Q92 Chair: Just very briefly and finally, do you have an assessment yet of what may happen in France as a result of the new President-we do not obviously know the result of the elections next month-and given the exposure that we now have to the intentions of EDF in terms of their rather crucial contribution to our nuclear programme, do you have any judgments about that at this stage?

Charles Hendry: We do not have a definitive view on it but we believe, as I was saying earlier on, that the benefit to the AREVA manufacturing plants of being able to have contracts overseas, if we are going to see fewer new power stations built in France, becomes a very important part of their industrial strategy. We have not picked up anything that would suggest President Hollande will be uncomfortable about EDF investing in the United Kingdom. We believe that they will continue to support it, as had been the case under the previous Administration.

Q93 Chair: Decommissioning costs, are they going to be a threat to EDF’s ability to go ahead with a new programme here?

Charles Hendry: No. A reactor is now designed with decommissioning in mind, which is a fundamentally different approach from the historical reactor design where it had not been considered at all. The cost of those issues are assessed, and they need to be taken account of because all of the developers are aware that they must be responsible for those costs.

Q94 Sir Robert Smith: Could we be in a similar situation if the French direction changed quite dramatically? The EDF’s finances would then be hit in the same way as the German generators were hit by an early decommissioning route, and then undermine their ability to invest.

Charles Hendry: President Hollande has said he wants to bring forward the closure of two plants, which are both close to the German border, but that is the only statement of what will happen in the course of this five years. We are not expecting a major decommissioning programme. I think that there is a sense that given the investment that has gone into these plants, they need to run their proper lives rather than incurring additional cost for French consumers through an early closure programme.

Q95 Barry Gardiner: Have you made an assessment of the French Government’s and the French banks’ exposure to Greek debt and the impact that might have on EDF?

Charles Hendry: No, we have not made a specific proposal on that. We try to understand the full range of issues that this is clearly a situation that is evolving day by day. EDF, as a major international company, would be borrowing at international money markets. It would not purely be through French banks but if it becomes evident that there is a wider issue to address then-

Q96 Barry Gardiner: But you will be aware that whereas in the UK both the Government’s and UK banks’ exposure to Greek debt stands at 14.2 billion, the French Government has 15 billion and French banks have 42 billion, and that might have a significant impact on EDF if it is seeking to put its investment into the UK. That might affect us.

Charles Hendry: I absolutely understand the point you are making but clearly, as I say, this is a rapidly evolving situation and the circumstances this week are different from those last week. It is inevitably going to be hard to predict the full ramifications of what needs to happen in those circumstances, but I agree with you that it is something that we need to understand more effectively.

Chair: Thank you very much for your time this morning. It is much appreciated, as ever. The Committee much looks forward to its pre-legislative scrutiny of the draft Bill, and looks forward to seeing that draft Bill next week, I think. I am sure we are going to be talking to you about that again in due course.

Prepared 1st March 2013